Skip to content

Young renters could be $600,000 better off than homeowners at retirement, here is why

  • by

Kinanti Desyanandini has decided that for now, buying a house is not on her agenda.

The 24-year-old product designer said she preferred the flexibility of renting over decades of mortgage debt.

“Buying a house is nice and is still something I want to do at some stage, but currently when I think of my KiwiSaver, having a comfortable retirement is my long term goal,” Desyanandini​ said.

Unlike older generations, many younger people were starting to see long term renting as a valid alternative to homeownership, she said.

READ MORE:
* Dos and Don’ts of investing for a house deposit
* Driving KiwiSaver risk and return
* Beware the fear of missing out – investing comes in many guises

She planned to continue to invest the money she would have used for mortgage repayments, to give herself more options later in life.

Research from investment fund Kernel Wealth showed a financial benefit for renters who invested in KiwiSaver, over people who withdrew that investment for a house deposit.

The Kernel data showed a lifelong renter who invested in a growth KiwiSaver fund would have over $600,000 more in overall assets than homeowners at retirement age.

While the homeowner had a total equity position of $8.26m the renter had a total equity position of $8.89m.

Kinanti Desyanandini is a renter investing for retirement not a house.  New research shows she may be wealthier than the average homeowner in her retirement years.

Supplied

Kinanti Desyanandini is a renter investing for retirement not a house. New research shows she may be wealthier than the average homeowner in her retirement years.

The reason for the difference is that the renter took advantage of compound interest, in which an investment earned interest on both the money they had invested and the interest the investment earned.

The research compared the overall assets at age 65 of two fictional investors who joined KiwiSaver at 23-years-old on an annual salary of $55,000.

The only difference between them was Investor A took out their KiwiSaver for a house deposit after 10 years, while investor B remained invested in KiwiSaver and rented throughout their life.

While the difference in overall asset value between the renter and the homeowner was $600,000, the gap grew even larger when considering the liquidity of their respective assets.

Liquidity is the ease with which a person can turn their assets into cash.

A bank checking account is highly liquid as it could be converted into cash in a matter of seconds at an ATM.

But a house was not liquid because to convert it to cash it needed to be put on the market, and could take a long time to sell.

The Kernel data showed the homeowner would have 69% of their overall wealth locked up in their house, and would have access to $2.5m of liquid assets.

Research from investment fund Kernel Wealth showed at retirement age, a lifelong renter that invested in a growth KiwiSaver fund would have over $600,000 more in overall assets than average homeowners.

SUNGMI KIM/Stuff

Research from investment fund Kernel Wealth showed at retirement age, a lifelong renter that invested in a growth KiwiSaver fund would have over $600,000 more in overall assets than average homeowners.

The renter would have $8.8m in liquid assets.

Kernel Wealth director of marketing and strategy Cat Emerson​ said the study reflected a mindset shift in a lot of young people.

“This is a generational shift … Covid-19 pushed people to reassess what flexibility means for them. For a lot of people in their 20s and 30s the idea of ​​being fixed to one location with a mortgage for 30 years is a bit foreign,” she said.

Emerson said the Kernel research required the renter to be extremely disciplined and to invest a large chunk of their disposable income.

Kernel Wealth director of marketing and strategy Cat Emerson says the liquidity of a large investment portfolio might give a renter more options than a homeowner in later life.

Abigail Dougherty/Stuff

Kernel Wealth director of marketing and strategy Cat Emerson says the liquidity of a large investment portfolio might give a renter more options than a homeowner in later life.

But even so the figure was still striking, especially when looking at the $6.3m difference in liquid assets, she said.

“This is a key difference, because you can easily sell a part of your investment portfolio, but you can’t sell off your bathroom or a part of your house,” she said.

Infometrics principal economist Brad Olsen​ said there was also an emotional element to consider.

“There are non-financial benefits to the property market. For a lot of people thinking of starting a family, they want the stability that owning your own home comes with. I think there is a psychological element not seen in the raw numbers,” Olsen said.

Infometrics principal economist Brad Olsen says there is an emotional element to owning your own property that makes it appealing to many New Zealanders.

MONIQUE FORD/Stuff

Infometrics principal economist Brad Olsen says there is an emotional element to owning your own property that makes it appealing to many New Zealanders.

A house was a tangible asset in a way that an investment portfolio was not, you could touch brick and mortar in a way you could not with the S&P 500, he said.

A house was also an investment that many felt they understood and gave the perception of control, he said.

But this did not mean housing was a better investment, he said.

“People look at housing and think the house will beat the stock market every time, but this is not true,” he said.

While the daily fluctuations of the stock market made it seem more risky, history showed that over time stocks outperformed property in the long run, he said.

Despite this, people still felt stocks were riskier than houses, and many would be unwilling to hold the bulk of their retirement savings in the stock market if they had the option to buy property, he said.

“People have a visceral gut reaction to red ink on their investment account that you don’t see when their property investment goes down,” he said.

But when a homeowner had paid off the bulk of their mortgage, and the house value had increased above the sale price, the homeowner would have access to a large asset to lend against that the renter would not, he said.

“You can leverage yourself when you have a property far more than owning stocks. Effectively you have a financial buffer that you can lend against,” he said.

Leave a Reply

Your email address will not be published. Required fields are marked *

BPISSUENEWS